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Exhibit TN-1 Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of New
Common Stock, and All Borrowings at 9.25%
Actual Forecast
2007 2008 2009 2010 2011 2012
Income before income taxes $3,773 $223 $4,182 $5,661 $6,604 $6,363
Balance Sheet ($000s except shares outstanding and book value per share)
Actual Forecast
2007 2008 2009 2010 2011 2012
Property, plant & equipment at cost $5,306 $6,116 $7,282 $8,182 $9,082 $9,982
Less: Accumulated depreciation $792 $1,174 $1,633 $2,179 $2,793 $3,474
Net property, plant & equipment $4,514 $4,942 $5,649 $6,003 $6,290 $6,508
Common stock at $0.01 per share par value $15 $15 $15 $15 $15 $15
Paid in capital in excess of par value $7,980 $7,980 $7,980 $7,980 $7,980 $7,980
Retained earnings $9,048 $9,182 $11,691 $15,087 $19,050 $22,868
Total shareholders' equity $17,043 $17,177 $19,686 $23,082 $27,045 $30,863
Total liabilities & shareholders' equity $27,939 $31,420 $35,120 $44,034 $51,926 $52,145
Book value per share $11.43 $11.52 $13.20 $15.47 $18.13 $20.69
Step 1 - Calculation of asset Beta for the industry using market value weights:
Micron Technology
D = book value of debt (4-30-2010) $2,760 25.8%
BVE = book value of equity (4-30-2010) $5,603
MVE = market value of equity (4-30-2010) $7,925 74.2%
βD = debt beta 0.20
βE = equity or levered beta 1.25
βA = asset or unlevered beta 0.98
SanDisk Corporation
D = book value of debt (4-30-2010) $975 9.6%
BVE = book value of equity (4-30-2010) $4,157
MVE = market value of equity (4-30-2010) $9,135 90.4%
βD = debt beta 0.20
βE = equity or levered beta 1.36
βA = asset or unlevered beta 1.25
STEC, Inc.
D = book value of debt (4-30-2010) $0 0.0%
BVE = book value of equity (4-30-2010) $276
MVE = market value of equity (4-30-2010) $699 100.0%
βD = debt beta 0.00
βE = equity or levered beta 1.00
βA = asset or unlevered beta 1.00
Since Flash is at the limit of its current loan agreement, management believes this is a
higher proportion of debt finance than optimal. As stated in the case, management has
set target capital structure weights equal to 18% debt and 82% equity.
βA = βD x (D/V) + βE x (E/V), where E = market value of equity and βD = 0.2
K = Wd x Kd x (1 - T) + We x Ke
(a) at 18% weight of debt Flash will be within the 70% of accounts receivable limit of
the existing loan agreement, thus the 7.25% cost of debt capital. If Flash was over
this limit and changed to factoring, the cost of debt capital would increase to 9.25%,
and the equity beta and cost of equity capital would also increase.
1.026667
Flash Memory, Inc.
Exhibit TN-3 Net Present Value of Investment in New Product Line ($000s)
Net working capital required to support sales $5,648 $7,322 $7,322 $2,877 $1,308 $0
Investment in net working capital (the year-on-year change) -$5,648 -$1,674 $0 $4,446 $1,569 $1,308 $0
Exhibit TN-4 Change in Forecasted Financial Statements due to Acceptance of Investment in New Product Line
Actual Forecast
2007 2008 2009 2010 2011 2012
Exhibit TN-5 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, No Sale
of New Common Stock, and All Borrowings at 9.25%
Actual Forecast
2007 2008 2009 2010 2011 2012
Income before income taxes $3,773 $223 $4,182 $5,661 $8,831 $9,349
Balance Sheet ($000s except shares outstanding and book value per share)
Actual Forecast
2007 2008 2009 2010 2011 2012
Property, plant & equipment at cost $5,306 $6,116 $7,282 $10,382 $11,282 $12,182
Less: Accumulated depreciation $792 $1,174 $1,633 $2,179 $3,233 $4,354
Net property, plant & equipment $4,514 $4,942 $5,649 $8,203 $8,050 $7,828
Common stock at $0.01 per share par value $15 $15 $15 $15 $15 $15
Paid in capital in excess of par value $7,980 $7,980 $7,980 $7,980 $7,980 $7,980
Retained earnings $9,048 $9,182 $11,691 $15,087 $20,386 $25,995
Total shareholders' equity $17,043 $17,177 $19,686 $23,082 $28,381 $33,990
Total liabilities & shareholders' equity $27,939 $31,420 $35,120 $46,234 $60,467 $62,255
Book value per share $11.43 $11.52 $13.20 $15.47 $19.03 $22.79
Exhibit TN-6 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, Sale
of 300,000 Shares of Common Stock Receiving Net Proceeds of $23 per share, and All Borrowings at 7.25%
Actual Forecast
2007 2008 2009 2010 2011 2012
Income before income taxes $3,773 $223 $4,182 $5,863 $9,671 $10,355
Balance Sheet ($000s except shares outstanding and book value per share)
Actual Forecast
2007 2008 2009 2010 2011 2012
Property, plant & equipment at cost $5,306 $6,116 $7,282 $10,382 $11,282 $12,182
Less: Accumulated depreciation $792 $1,174 $1,633 $2,179 $3,233 $4,354
Net property, plant & equipment $4,514 $4,942 $5,649 $8,203 $8,050 $7,828
Common stock at $0.01 per share par value $15 $15 $15 $18 $18 $18
Paid in capital in excess of par value $7,980 $7,980 $7,980 $14,877 $14,877 $14,877
Retained earnings $9,048 $9,182 $11,691 $15,209 $21,012 $27,224
Total shareholders' equity $17,043 $17,177 $19,686 $30,104 $35,907 $42,119
Total liabilities & shareholders' equity $27,939 $31,420 $35,120 $46,234 $60,467 $62,255
Book value per share $11.43 $11.52 $13.20 $16.80 $20.04 $23.51